Afghanistan: Iran sanctions, dollar smuggling add to currency woes

The afghani is taking a hit as dollar smugglers capitalize on the shortage of foreign exchange in neighboring Iran. Is the outflow drying up dollars from Afghanistan? DW speaks to the head of the country's central bank.

The United States' renewal of sanctions on Iran is having an unintended knock-on effect on Afghanistan. The country's currency is taking a beating as dollar smugglers rush to provide much-needed foreign exchange to the neighboring Iranian economy.

The sanctions, which came into effect earlier this month, have caused an acute shortage of dollars in Iran, hurting importers and Iranians, who need the greenback to travel abroad.

"It's difficult to ascertain how much [dollars] is flowing into Iran because of smuggling but certainly it is going. I say that because the main depreciation has happened here since the US withdrew from its agreements with Iran," the governor of Afghanistan's central bank, Khalil Sediq, told DW.

"From that day onwards, the rial [Iran's currency] began depreciating day by day. So certainly this is encouraging smugglers to find ways to smuggle foreign exchange to benefit from this situation," he said.

Afghanistan's currency, the afghani, has been on a downward spiral since the end of 2014, when a bulk of foreign troops were drawn out. The afghani has fallen 20 percent during that period, mainly due to a worsening security situation and a huge trade deficit.

Your browser doesn't support HTML5 video

It has fallen nearly 4 percent since May, when US President Donald Trump abandoned the Iran nuclear deal and announced a renewal of tough US sanctions on the Islamic republic. The Iranian rial has fallen nearly 40 percent since.

Read moreUS reimposes sanctions on Iran: What does that mean?

Porous borders

Iran and Pakistan are Afghanistan's biggest trade partners, accounting for almost a third of the landlocked country's trade turnover. Any crisis afflicting them has a direct impact on Afghanistan's economy and currency. 

For instance, Afghanistan risks importing inflation from Iran, where the rial's fall has led to a rise in prices of essential goods, especially those that are made from imported raw materials.

But for dollar smugglers in the western provinces of Herat, Farah and Nimruz, situated along the Iranian border, it's a perfect time for business.

Traders from these provinces have traditionally crossed into Iran to trade goods. But a sharp fall in the value of the rial against the dollar has made transferring the greenback to Iran a profitable business on its own.

The surge in smuggling has irked residents in Herat, where an increased demand for dollars has led to a fall in the value of afghani.

Read moreHow the EU plans to get around US sanctions on Iran

A sharp fall in Iranian rial against the dollar has made transferring the greenback across the border to Iran a profitable business on its own.

As much as $2-3 million (€1.7-2.6 million) cross the porous borders of the three provinces into Iran every day, Reuters reported, citing estimates provided by the Federation of Money Changers of Herat.

Sediq, who in a testimony before Afghan lawmakers in July cited dollar smuggling as a major reason behind the afghani's depreciation, says it's not possible to control "each inch" of the country's borders.

"So certainly, if there is any change in a neighboring country, if there is an increase in demand for foreign currency there, then people will certainly smuggle foreign currency," said Sediq.

The central bank governor, however, disputed the figure given by the money changers, saying that's equal to the amount of dollars smuggled every day to Iran, Pakistan and the United Arab Emirates combined.

Read moreWho will suffer when the US resumes Iran sanctions?

'Forex reserves unaffected'

Sediq, whose bank is responsible for keeping the currency stable, said the spike in smuggling activity has had no impact on the country's foreign exchange reserves of around $8.1 billion.

"We are not providing dollars from our reserve for people to smuggle," he said.

The central bank governor stresses that 80-90 percent of the foreign exchange auctioned by the bank is used to finance its affiliated banks.

Even the money changers who buy foreign currency from the banks sell it to the traders who pay for the imported goods through legal channels, he said.

"We are monitoring the inflow as well as the outflow. So these things (smuggling) will not affect our reserves and we will not allow them to affect it," Sediq said.

Sanctions signed off
US President Trump signed an executive order on August 5 aimed at piling financial pressure on Tehran to force a "comprehensive and lasting solution" to Iranian threats, including its development of missiles and regional "malign" activities. Trump warned that those who don't wind down their economic ties to Iran "risk severe consequences."
Where's the money?
The first phase, which took effect on August 7, targets the Islamic Republic's access to US banknotes, making transactions in a US-dollar dominated financial world difficult. A ban on Iran purchasing precious metals including gold further serves as an attempt to cut the country off from global markets.
Planes, cars and carpets
Phase one also hits key industries including the purchase of commercial planes, cars and carpets. Iranian imports of graphite, aluminum, steel, coal, gold and some software are also affected. German automaker Daimler called off the production and sale of Mercedes-Benz trucks in Iran indefinitely after the sanctions came into force.
Fuel to the fire
A second phase of sanctions — which is due to take effect on November 5 and will block Iran's oil sales — is due to cause more damage. Several countries, however, including China, India and Turkey have indicated they are not willing to entirely cut their Iranian energy purchases.
'Psychological warfare'
Iranian President Hassan Rouhani said that the United States had launched "psychological warfare" against Iran to create division amongst its people. But he insisted that Iran still can rely on its allies China and Russia to keep its oil and banking sectors afloat. He has also demanded compensation for decades of American "intervention" in the Islamic Republic.
EU protection
European Union foreign policy chief Federica Mogherini said the bloc is encouraging small and medium enterprises to increase their business with Iran. She said Tehran has been compliant with their nuclear-related commitments. The EU issued a "blocking statute" to protect European businesses from the impact of the sanctions.
Date 21.08.2018
Author Ashutosh Pandey